PAYING THE GULF TAB WHAT'S FAIR? WE SHOULD THINK ABOUT TAXING THE SUPER-RICH, IMPORTS AND CONSUMPTION

By Jodie T. AllenJanuary 27, 1991

HOW SHOULD we pay for the war?

Press reports about this week's State of the Union message suggest that President Bush thinks the answer is another dose of the old supply-side elixir -- more capital-gains tax cuts and other "growth incentives" for the well-to-do. Perhaps the press has been misled. ("Stay tuned," Bush replied on Friday to a reporter's question on the matter.) Or perhaps the president hopes that this time the wealthy will eschew the speculation in junk bonds, real estate and other assets that temporarily masked, but ultimately accelerated, the nation's economic decline. In any case, it will be a hard sell.

A hard sell -- especially to a middle class that during the '80s saw its taxes rise while its income stagnated, even as it watched the incomes of our best-off citizens soar by almost 50 percent and their taxes fall by nearly 10 percent. (And when Presidents Reagan and Bush talked about "no new taxes," they didn't mean no new Social Security taxes or state or local taxes either.) This is the same middle class whose sons and daughters are the mainstay of U.S. forces in the Persian Gulf. In deciding where the financial sacrifice should fall, "blood ought to count for something," remarked one Hill staffer.

Looking at the benefit side, as The Washington Post's polling director, Richard Morin, noted in these pages a few weeks ago, surveys taken in the crucial weeks before the Iraq war began showed that support for hostilities was strongest among higher-income families and individuals. So one may fairly assume that at least the psychic benefits from the war are highest among the affluent.

Of course, in weighing costs and benefits, it must be recognized that the entire nation gains immeasurably from the defense of the nation's security. Indeed, Congressional Budget Office Director Robert Reischauer went so far as to suggest to Congress last week that since war is an "investment" in our future, we might put off paying its costs for "an extended period of time."

Still, the depths of gratitude that we may fairly expect from generations yet unborn have surely been amply plumbed by the staggering public and private debt already amassed over the last decade. These future Americans will surely wonder why our pampered consumers could barely make a down payment on their own bills. The financial markets already wonder -- they have built a hefty premium into long-term interest rates on the basis of obligations accrued even before the war.

This is not to say that we need to pay the Gulf War bill all at once or all by ourselves. As Federal Reserve Chairman Alan Greenspan pointed out last week, this is, at least so far, largely an off-the-shelf war. The big-ticket items we're using up -- missiles, planes and high-tech tanks -- were bought on credit during the years in which Ronald Reagan waged the fiscal equivalent of war -- and enjoyed the economic stimulus the defense build-up produced. Apart from expendables that the Defense Department was already buying -- uniforms, chemical protective gear, certain munitions and spare parts -- the military should not need to replace its lost or damaged weapon systems at once. Those that were obsolete will not need to be replaced at all, beyond already planned modernization programs. And, as the American war effort ground on toward success last week, others among our allies seem to be following Japan's lead, digging deeper into their pockets to help pay for both the war and its aftermath.

But one way or another, we're looking at a bill that, for even a three-month war, might add some $40-50 billion to the federal budget over the next few years. Who should foot it?

If you asked the public, the answer is a sure bet: the very rich. In mid-December, for example, a Wall Street Journal/NBC poll found that a staggering 84 percent of the public favored the surtax on millionaires which was dropped in last fall's final budget compromise. As for cutting the capital-gains tax, 51 percent of the public favored raising it and only 43 percent opposed such a hike. (Did anyone at the White House tell this to the president?)

So if the commander-in-chief, who has so successfully marshaled the support and personal sacrifice of Middle America in pursuit of his war aims, wants now to respond to their feeling as to how the monetary burden should be borne, he will surely turn to the most-favored among his constituents for a temporary financial contribution. House Republican Leader Robert Michel (Ill.) acknowledged as much last week in saying that an income surcharge was the most likely alternative for financing the war, though he wondered gloomily if it would, in fact, be temporary.

But while taxing the very rich would provide necessary moral returns, it would not alone provide sufficient dollar returns. The surtax on income above $1 million proposed last year by congressional Democrats would yield about $7.5 billion over the next five years -- not a trifle, but not enough to support a half-billion-dollar-a-day war that officials are now saying could drag on for months. Another hike in gasoline taxes is an obvious added revenue source, with its promise of promoting fuel conservation. But gas taxes, while lucrative (each penny added raises about $1 billion), are very unpopular with Middle America. Broader-based energy taxes raise less rancor but feed into production costs and hurt competitiveness.

A more widely acceptable alternative would be to smooth out the "bubble" in the personal income tax enlarged by last year's budget agreement so that the top rate paid by the really-rich reached the 34 to 35 percent marginal rate already faced by many of the not-quite-so rich. That could raise perhaps $20 billion over five years.

But a hefty boost in tax rates over a substantial part of the investing class would fuel demands for a preferential rate for capital gains income -- which, in turn, would reopen all the opportunities for sheltering income that so distorted the economy in the late '70s and '80s.

So what else could we tax? Why not consumption generally? -- we have too much of that and too little of savings. The thought has apparently crossed the mind of House Speaker Thomas S. Foley (D-Wash.) who is said to be looking seriously at a business-transfer tax. The BTT is a somewhat easier-to-collect version of the value-added tax now employed by all 12 members of the European Community along with some 35 other industrialized nations.

BTTs or VATs are boffo money raisers (each percentage point of a broadly applied tax raises about $25 billion, excluding basics such as food, health care and housing would cut the take to about $15 billion.) A modest BTT or VAT could not only fund even a long war but leave enough over to lighten the burden of Social Security taxes on U.S. companies and workers and even add money to important social programs. Finally, there is the added virtue that, under international trading rules, the tax can be applied to imports (and rebated on exports) as well. So Uncle Sam wouldn't have to go around the world with a tin cup in hand; he could stay home and collect from our principal competitors -- just the way they do from us.

Who knows? We might come out of this war with a better tax system than we went into it with.